All else equal, rising inequality lowers federal budget deficit: How much the decrease in transfer spending and the increase in tax revenues arising from growing inequality lowered the federal deficit, as a share of GDP
Effect of transfers | Effect of taxes | Total change in deficit | |
---|---|---|---|
1979 | 0% | 0% | 0% |
1980 | -0.05% | -0.07% | -0.12% |
1981 | -0.13% | -0.09% | -0.22% |
1982 | -0.29% | -0.18% | -0.47% |
1983 | -0.54% | -0.23% | -0.77% |
1984 | -0.43% | -0.25% | -0.68% |
1985 | -0.57% | -0.27% | -0.85% |
1986 | -0.91% | -0.36% | -1.27% |
1987 | -0.79% | -0.42% | -1.21% |
1988 | -0.91% | -0.55% | -1.47% |
1989 | -0.83% | -0.48% | -1.31% |
1990 | -0.69% | -0.44% | -1.13% |
1991 | -0.60% | -0.42% | -1.02% |
1992 | -0.80% | -0.52% | -1.32% |
1993 | -0.79% | -0.56% | -1.35% |
1994 | -0.78% | -0.63% | -1.40% |
1995 | -0.75% | -0.72% | -1.47% |
1996 | -0.97% | -0.88% | -1.85% |
1997 | -1.08% | -0.97% | -2.05% |
1998 | -1.15% | -1.00% | -2.15% |
1999 | -1.24% | -1.12% | -2.36% |
2000 | -1.40% | -1.21% | -2.62% |
2001 | -1.16% | -0.98% | -2.14% |
2002 | -0.97% | -0.84% | -1.82% |
2003 | -1.15% | -0.90% | -2.05% |
2004 | -1.38% | -1.08% | -2.46% |
2005 | -1.66% | -1.28% | -2.95% |
2006 | -1.78% | -1.34% | -3.12% |
2007 | -1.73% | -1.25% | -2.98% |
2008 | -1.42% | -1.22% | -2.65% |
2009 | -1.14% | -1.01% | -2.16% |
2010 | -1.53% | -1.19% | -2.72% |
2011 | -1.56% | -1.21% | -2.78% |
2012 | -2.19% | -1.55% | -3.74% |
2013 | -1.66% | -1.45% | -3.11% |
2014 | -2.00% | -1.66% | -3.66% |
2015 | -1.96% | -1.57% | -3.53% |
2016 | -1.77% | -1.46% | -3.23% |
2017 | -1.99% | -1.53% | -3.52% |
2018 | -1.97% | -1.48% | -3.44% |
Notes: The figure estimates the “all else equal” effect of government spending on transfers and estimated government revenues from taxes had household groups kept the same share of income as they had in 1979 but everything else (average rates of growth and tax and transfer rates) followed the same path as actually occurred. The difference is the effect on the federal deficit. For example, as reflected in the top line, since the income share of the top 1% rose steeply after 1979, tax revenue collected from the group was much greater than it would have been in the counterfactual scenario, and this lowered the deficit relative to the counterfactual scenario.
Extended notes: To construct these estimates, each income group’s share of aggregate income is held constant at the 1979 level while the effective tax and transfer rates for each income group follow the actual data. This counterfactual (i.e., no rise in inequality) level of tax revenue and transfer income by group is then summed across groups for each year, and is subtracted from the actual revenue and transfers in those years of increasing inequality.
Source: Household income data from the Congressional Budget Office (CBO 2021).